Investment banking firm Morgan Stanley reported earnings last October and shareholders had reason to be disappointed. The firm saw stable growth in its wealth management and merger advisement business, but the drop in trading overshadowed the positive results in those two smaller sectors of the firm. In addition, the institutional securities division of the investment giant, traditionally the source of significant revenue and profit, saw a massive decline. The division is home to Morgan Stanley’s well known investment banking and trading operations and it saw a 14 percent drop in revenue to 3.9 billion USD. Profits fell by almost 50 percent to 688 million USD.
Experts blame the drop in the institutional securities division on a worldwide slowdown in fixed income currently trading, as well as losses in commodity trading activities. Hedge fund manager and industry analyst Vito Golden, a former executive at an investment firm, notes “we are 7 years after the crash and firm like Morgan Stanley are still seeing the kind of volatility in profit and revenue numbers that should give us pause. We just saw Morgan Stanley’s largest division lose 14% of its quarterly revenue and over half of its quarterly profit in one announcement.”
Nevertheless, Morgan Stanley’s CEO James P. Gorman remains optimistic. In a recent interview, he compared the firm to an aircraft carrier, saying that wealth management division is the “ballast”, while the securities group is the “engine room.”
Since 2008, investment firms like Morgan Stanley were forced to restructure to shed risk and improve stability in light of the Great Recession. Laws like the Frank Dodd Wall Street Reform and Consumer Protection Act increased regulatory oversight and gave federal officials unprecedented oversight of banking functions. At the same time, the improving economy and the boom of the global one percent has offered firms like Morgan Stanley new opportunities to improve their balance sheet and maximize profit by appealing to the world’s richest individuals and corporations.
In spite of the disappointing earnings announcement, Gorman sees tremendous opportunity to grow Morgan Stanley, in part by grooming the bank’s top talent. Morgan Stanley, according to Gorman, spends significant resources figuring out who at the firm will represent its next crop of leaders. Emphasis is placed on individuals that show a willingness and know how to navigate the firm through everything from a disappointing earnings announcement, to the next financial crisis. We are looking for the next “collaborators and stirrers” says Gorman.
In spite of the positive words from Gorman and the emphasis on stability in the hiring and training process, some are not convinced that Morgan Stanley is ready. Vito Golden has friends at the firm and hopes it can withstand the next financial downturn, but he is not buying much of what Gorman has said to reassure investors and the public. “Every time Gorman is asked about the possibility of another Great Recession and what Morgan Stanley is doing to prevent the next meltdown, he just turns to buzzwords” said Golden. We just saw a 50 percent drop in profit in one quarter and he is talking about stirrers and collaborators and parts on a ship. What is this? He may as well say synergy and leverage in the same sentence because it is all meaningless buzzwords that won’t reassure investors and won’t prevent another meltdown.”